Issues and Trends in Medical Professional Liability: Update on PIAA - PowerPoint PPT Presentation

Issues and Trends in Medical Professional Liability: Update on PIAA Financial Results Prepared For: Casualty Loss Reserve Seminar Prepared By: Kevin J. Atinsky, F.C.A.S., M.A.A.A. Chief Actuary Medical Mutual Insurance Company of Maine katinsky@medicalmutual.com September 14, 2009

Disclosures  Content of presentation is based on 2nd Quarter 2009 edition of The Physician Insurer , trade publication of the Physician Insurers Association of America (PIAA); article entitled “Industry Update: Tilting Away from Further Improvement” by Kevin Atinsky and Chad Karls  Source data based upon an analysis of a 49 PIAA member company compilation of year-end financial statements provided by National Underwriter Data Services from Highline Data 1

Overview of Presentation  Overview and highlights  Update on PIAA financial results  Top-line premium growth  Operating performance  Capitalization levels  Concluding thoughts 2

Overview and Highlights  Last year we posed, “Is this as good as it gets?”  With one more year of unfolding, now seems probably so  2008 reflected record underwriting results  Offset to some degree by investment fallout caused by impairment in financial markets  Maintained strong capitalization levels  Caution that investment risk has increased  Impacts “required” capital and thus relative adequacy  Declaration of $200 million in policyholder dividends in 2008 over $450 million past two years  AIG warrants attention due to vast market presence 3

Direct Written Premium Growth ($Billions) $6 2.5% (0.3)% 9.4% (6.1)% $5 19.2% (5.5)% 30.5% $4 26.1% $3 4.9% $2 $1 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 4

Direct Written Premium Growth Notable Observations  Last two years represent fairly sizable reductions  11% drop is largest two-year reduction in tracked history • 7.5% reduction during 1990 and 1991 • 2.5% reduction during 1996 and 1997  Modest rate reductions and increased use of credits  Combined revenue impact of $600 million  Notable that underwriting results have continued to improve during this period  Driven by favorable reserve development and continuation of reduced claims frequency 5

Combined Ratio Components 140% 130% 129% 124% 123% 118% 120% 108% 97% 100% 89% 85% 77% 80% 60% 40% 20% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Loss & LAE Ratio Underwriting Expense Ratio Policyholder Dividend Ratio 6

One-Year Reserve Development to NEP 15% 10.2% 10% 7.3% 5% 2.7% 0% -5% -3.4% -6.0% -10% -11.3% -12.3% -15% -20% -20.0% -19.2% -25% -30% -28.5% -35% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 7

Operating Ratio Components 140% 140% 120% 120% 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0% -20% -20% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Combined Ratio Operating Ratio Investment Income Ratio Realized Capital Gains Ratio 8

Operating Performance Notable Observations  2008 underwriting results one of best ever  Key contributor was favorable reserve development  Highlights importance of assessing reserve position  Investments suffered from broader economic turmoil  Investment gain ratio (to NEP) of 9% in 2008 compares to recent historical results in the 20% to 25% range  Despite poor investment results, the 2008 operating results were nearly as good as 2007 9

Policyholder Surplus Growth ($Billions) $9 2.1% 16.8% $8 $7 19.1% $6 14.7% 15.0% $5 (2.1)% (5.4)% 5.0% (6.8)% $4 $3 $2 $1 $0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 10

NAIC RBC Ratio 800% 735% 734% 700% 606% 588% 567% 600% 506% 495% 500% 416% 383% 376% 400% 300% 200% 100% 0% 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 11

Capitalization Levels Notable Observations  Following several years of double-digit growth, surplus levels relatively flat during 2008  Impacted by unrealized losses and stockholder dividends  RBC, which normalizes for underlying risk, and is used by regulators, was flat after large advancements  In light of historical underwriting volatility, and recent increase in investment risk, it seems as if the strengthened capital levels are essential 12

Concluding Thoughts

Concluding Thoughts  Future financial results largely pinned on reserve adequacy and sustainability of claims frequency  In 2008, reserve releases totaled $1.2 billion  Another critical area to monitor is investments  Uncharacteristic to this industry  2009 will reveal important indicators as to the future results in areas of reserve adequacy, claims frequency and investment outlook  Forces skewed more towards deterioration, and thus, tilting away from further improvement 14